Market Efficiency and Predictable Supply Shocks: Short-Selling Returns Around IPO Lockups (Oxford Journal of Student Scholarship)

Summary

• A systematic backtest on 26 usable post-listing restricted-share events from 2020 through 2025 evaluated short-selling returns around lockup expirations.p.1
• The T-3 to T+3 trade strategy produced a 58% win rate and an average raw short return of 4.07%.p.1
• The strategy achieved a 4.42% average market-adjusted return with a standard deviation of 12.31%.p.1
• The conventional 95% t interval ranged from -0.55% to 9.39%, indicating the results are suggestive rather than conclusive.p.1
• Foundational literature by Field and Hanka (2001) analyzed nearly 2,000 IPOs and documented a permanent trading volume surge of roughly 40% at lockup expiration.p.3
• Comparing exit timings showed that exiting at T+3 produced a higher win rate of 58% (15/26) than exiting at T+5, which generated 50% (13/26).p.6

Key insights

1. Simulating a T-3 entry and T+3 exit across 26 post-listing events yielded a 4.07% average raw short return and a 4.42% average market-adjusted return.p.1
2. Because the conventional 95% t interval ranges from -0.55% to 9.39% and includes zero, the empirical findings remain suggestive rather than conclusive.p.1
3. Comparing exit strategies showed that T+3 achieved a 58% win rate and a maximum drawdown of -24.6%, outperforming T+5 which had a 50% win rate and a -31.5% maximum drawdown.p.6
4. Excluding two direct listings and two de-SPAC events increased the average market-adjusted return from 4.42% to 5.94% across 22 conventional IPO events.p.10
5. The cloud technology sector formed the largest subgroup with seven trades, generating a 71% win rate.p.14
6. Cumulative average market-adjusted short returns peaked at T+2 before declining through T+3 and toward T+5.p.13
7. Trade friction costs, borrow fees, slippage, and share availability constraints could materially reduce realized strategy returns.p.1